Wednesday, January 28, 2009

Banks Spur Market Bounce

By JON HILSENRATH and JONATHAN WEISMAN
President Barack Obama's $825 billion stimulus package is hatching against a drumbeat of dour economic news, from plunging consumer confidence to a stream of layoff announcements, some at firms that stand to benefit from the plan.The developments are raising new doubts about whether the plan will be enough, or come in time, to moderate an increasingly severe downturn. They also underscore the administration's challenge: how to warn people that the plan might not be a cure-all without painting an overly pessimistic picture.
Economists have been ratcheting down their already weak growth forecasts even as a large stimulus plan has become more likely. A weekly survey by Macroeconomic Advisers LLC, a research firm, shows forecasters think the economy is contracting at a 4.3% annual rate in the current quarter, much worse than the 1.5% contraction predicted two months ago.
Corning Inc., a New York producer of fiber-optic cable, flat-screen television supplies and other products, said Tuesday that it would lay off 3,500 workers, or 13% of its work force, despite major provisions in the stimulus plan that could help the company.
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For Corning, the plan could include $6 billion to $9 billion of new federal spending to wire community colleges, libraries and rural governments with high-speed Internet equipment. In addition to supplying fiber-optic equipment, Corning supplies products that could benefit from efforts to retrofit diesel truck engines.
Corning's chief executive, Wendell Weeks, will meet with Mr. Obama Wednesday along with a number of other chief executives to offer his support for the stimulus plan. Still, the company has been hit so hard by the downturn that it is moving ahead with layoffs to meet its cash-flow targets.
Daniel Collins, a Corning spokesman, said that while the stimulus is likely to help, it isn't clear when, or how much. "You can't bank on hope," he said.
Corning's announcement came a day after Caterpillar Inc., maker of earth movers that could be needed for infrastructure projects proposed by Mr. Obama, said it would lay off 20,000 workers in all. Several other companies added to the tide with tens of thousands in work-force cuts.
Ken Simonson, chief economist for Associated General Contractors of America, said that for suppliers like Caterpillar, inventory is another problem. Construction companies "have a lot of equipment parked at the fence," he said. Even when stimulus funds start flowing, they will be dusting off the earth movers they already own or buying and leasing equipment from other contractors with idle equipment.
All else being equal, Mr. Simonson estimated that the plan as currently formulated could create 1.8 million construction jobs in its first year. But the sector has shed 899,000 jobs from its peak in September 2006.
"There's going to be such shrinkage in private construction projects -- offices, hotels, retail, manufacturing -- and also declines in state and local funded projects that I'm guessing the stimulus will just slow the decline," he said.
Goldman Sachs economists say $1.2 trillion in fiscal stimulus is needed over two years to offset the sharp private-sector contraction.
Many economists say the risks for the remainder of the year are on the downside. The consensus calls for the economy to contract more in the second quarter and then to begin growing slowly by the middle of the year.
White House aides are quick to damp expectations of a quick turnaround. The Caterpillar and Corning cuts are "consistent with the view that the cavalry isn't coming that fast, and when it comes, it won't be the difference between life and death," one administration official said.
The Congressional Budget Office estimates that $169 billion of the $825 billion in stimulus will hit the economy before the end of September and that the bulk of it will show up in 2010 and 2011.
The estimates point to one of the challenges of formulating an effective plan. Tax cuts can be implemented quickly, but many economists think they wouldn't stimulate much new spending because consumers and businesses are so keen on saving. Government spending would generate economic activity more quickly, but it is hard to ramp up right away.
The one thing that is certain to flow from the stimulus is a large increase in the federal debt. Large government budget deficits are showing signs of starting to nudge interest rates on government debt higher, from very low levels.
If that persists, it could eventually damp some of the stimulus-plan's benefits. Higher government rates raise the cost of borrowing not only for the Treasury, but also for many private-sector borrowers, since corporate bonds and mortgage bonds are often benchmarked to Treasury yields.
Bond markets have been hit by a flood of new supply of Treasury debt in the past few weeks, a factor that some traders say has pushed up rates. The yield on a 10-year note hit 2.519% Tuesday, up from a little over 2.00% at the end of 2008.
A report this week by Decision Economics Inc., a New York economic-forecasting firm, says deficits in 2009 and 2010 will reach between 10% and 12% of gross domestic product, respectively, roughly double the previous peacetime records set in the Reagan years. It added that federal debt will soar from about 70% of GDP to more than 90% of GDP.
Allan Sinai, chief economist at Decision Economics, says the rise in debt eventually will lead to slower economic growth and diminished standards of living in the U.S. He nevertheless supports the Obama stimulus plan.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Jonathan Weisman at jonathan.weisman@wsj.com